When You Sell Your Home for a Profit…Capital Gains Tax

When You Sell Your Home for a Profit…Capital Gains Tax

A Note on the Federal Tax Consequences

Q:My husband and I plan to sell our home. What happens when you sell your primary residence for a profit?

— P.E., Los Angeles

A: When you sell your home for a profit, you don’t owe Uncle Sam any capital gains tax. But there are important exceptions to this general rule, and lots of fine print that may be important, depending on your circumstances. A summary:

A married couple filing jointly may be eligible to exclude as much as $500,000 of the gain from their gross income. If you and someone else owned the home jointly but file separate returns, each may qualify to exclude up to $250,000.

To qualify for the full exclusion of capital gains tax , you typically must have owned and used the home as your principal residence for at least two of the five years preceding the sale, says Barbara Weltman, an attorney and author of numerous books, including several J.K. Lasser tax guides. Also, during the two-year period ending on the date of the sale, you typically can’t have excluded the gain from the sale of another home.

The ownership and use periods don’t have to be continuous, the IRS says in Publication 523, “nor do they both have to occur at the same time.” The IRS says: “You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the five-year period ending on the date of sale.” A home improvement can improve your tax bill.

If you can’t pass the use and ownership tests, you might still qualify for a reduced, prorated exclusion of capital gains tax, according to the EY Tax Guide 2014 (EY stands for Ernst & Young). For example, you might be eligible for a reduced exclusion if you sold the home primarily because of a change in place of employment, health reasons or “unforeseen circumstances,” such as a death, divorce or multiple births from the same pregnancy.

I realize you expect to make a profit. Congratulations. But if you wind up losing money, keep in mind that you can’t deduct a loss on the sale of your personal residence.